? SA Consensus Outlook
? The Benefits of being patient in Investment
? Company Review - Afrox
? April Buys and Sells
Dr Gad Ariovich, editor and Investment Consultant
Contributors: Desmond Esakov, Charl Marais
SA Consensus Outlook
Ave 90-009899000102SA - Business Cycle IndicatorsBusiness Cycle Indicators Lead104.2102.5106.4119.1122.5134.6Lag96.996.591.188.993.4Coincident93.993.489.693.596.298.1 130The coincident indicators suggest that the economy has Leadbeen on an upswing since mid-1999, but not with great 120momentum. The rise in the leading economic indicators
probably signals a continued economic recovery. 110 Source: Reserve Bank 100Lag 90Coincident
Ave 90 - 00990001020304
SA - GDP 22.214.171.124.12.1 (2.0)3.13.16 2002 - SD = 0.4 High = 2.8 Low = 1.3 Median = 2.0
2003 - SD = 0.4 High = 3.8 Low = 2.1 Median = 3.05 4In line with the leading indicators the consensus
suggests higher economic activity over the next three 3years, but at not particularly exciting rates. 2
The GDP growth rate forecast for 2002 was revised 1upward in March to 2.1% from 2.0% suggested three 0months ago. -1 -2Source: Beeld Newspaper and Reuters -3
SA- Growth Rate Private Consumption
SA - Growth Rate Private Consumption 126.96.36.199.32.2 (2.0)
Expenditure2002 - SD = 0.5 High = 3.0 Low = 1.0 Median = 2.2 Private consumption expenditure (PCE), the lion‟s 8.00share of GDP, is forecast to grow at 2.2% during 2002
in comparison with 2.0% predicted three months ago. 6.00This upward revision is probably due to the expected
increase in GDP and hence the additional consumption 4.00that should follow.
2.00 Source: Beeld Newspaper 0.00
SA – Gross Domestic Fixed Investment
SA - Gross Domestic Fixed Investment1.6-6.01.33.03.3 (1.9) The Achilles heel of the South African economy is 12revealed when we look at fixed investment growth in
10the economy. Over the last ten years GDFI grew by an annual average of only 1.6%. 8 6However, most economists foresee an improvement 4in GDFI, which is expected to grow by 3.3% this 2year compared to the 1.9% that was forecast a quarter 0ago. -2
-4 -6 -8 -10 90919293949596979899000102
SA – Government Expenditure
%SA - Government ExpenditureA positive trend in the South African economy was 25the declining rate of government expenditure. This
may be a symptom of tight fiscal policy (other things
being equal). 20In his budget speech in February the Minister of
Finance announced his intention to increase
government capital expenditure. This is contrary to 15the policy of the previous regime when most budget
increases were directed towards consumption Trend10expenditure – i.e. salaries and remuneration of civil
5 Source: Department of Finance
SA – Inflation (CPI)
Ave 90 - 00990001020304
2002 - SD = 1.0 High = 9.5 Low = 5.5 Median = 7.6
2003 - SD = 0.7 High = 7.1 Low = 4.0 Median = 6.0 The consensus suggests an increase in the inflation
rate from 5.7% in 2001 to 7.5% this year. With the
heavy depreciation of the rand last year this estimated
increase in inflation was inevitable.
These rates are significantly higher than rates in the
developed world. Even among emerging countries,
such rates are not considered to be acceptable.
The consensus however suggests lower inflation rates
in both 2003and 2004, most likely due to a possible rebound in the R/$ exchange rate (or at least more
moderate fall in the future) and the Reserve Bank‟s
decision to implement a tighter monetary policy.
Source: Beeld Newspaper and Reuters
SA – Inflation (PPI)
Ave 90 - 00990001020304SA Inflation - PPI%188.8.131.52.812.7 (8.9)6.95.7142002 - High = 11.1 Low = 7.0 Median = 8.6 12The consensus forecast for the PPI has been revised
significantly upwards from 7.8% to 12.7% for 2002. 10This is a high rate of inflation by international
standards and is due to a much weaker rand over the 8last nine months. However, with the forecast
predicting a consolidation in oil prices and slower
depreciation in the external value of the rand, 6increases in the PPI index are likely to decelerate in
2003 and 2004 as indicated by the consensus 4forecast.
2 Source: Reuters 0 9495969798990001020304
SA – Current Account RAve 90 - 00990001020304SA - Current Account
-2246.7-3398.0-4885.7-1357.7-856.7-571.0#REF!150002002 - SD = 9167 High = 38700 Low = -25700 Median = -3750 10000 Current Consensus: -856.7 Previous Consensus: -21940 5000
The melting-down of the rand exchange rate and 0lower economic activity tend to result in smaller
current account deficits. The consensus view suggests -5000that this year there will be a more balanced current -10000account.
-15000Source: Beeld Newspaper and Reuters -20000 -25000 909192939495969798990001020304
R153 – Interest Rate %Ave 90-00990001020304R153 - Interest Rate
15.114.813.811.312.2 (11.8)11.911.2222002 - SD = 1.0 High = 14.3 Low = 10.3 Median = 12.3 20The consensus suggests higher long-term interest
rates. This is probably a result of higher inflationary
expectations over the medium term. 18During the last three months the consensus view on
bond yields for 2002 was revised upwards from 1611.8% to 12.2%.
Source: Beeld Newspaper and Reuters 12
SA – Prime Rate
Ave 90-00990001020304%SA - Prime Rate18.518.014.513.816.0 (14.9)14.513.0
2002 - High = 16.0 Low = 14.0 Median = 15.025 The consensus for the average prime rate for this year
has been revised up to 16.0% from the 14.9%
suggested three months ago. It predicts however a 20decline over 2003 and 2004.
Rand/Dollar Exchange Rate R/$Ave 90 - 00990001020304Rand/Dollar Exchange Rate
4.26.17.08.711.8 (12)12.514.3162002 - SD = 0.8 High = 13.75 Low = 10.2 Median = 11.8 14The consensus forecast for the rand dollar exchange
rate has been revised from 12.0 R/$ just 3 months ago 12to 11.8 R/$ at the end of 2002. Thereafter the
consensus suggests a depreciation to 12.5 R/$ during 102003 and 14.3 R/$ in 2004. This outlook is more
positive than the consensus view three months ago. 8
(Contrary to the consensus view, we believe that the 6rand will be stronger by the end of the year.)
2Source: Beeld Newspaper and Reuters 9495969798990001020304
SA - Gold & Oil Prices
Ave 90-0099000102SA - Gold & Oil Prices
Oil19.318.528.524.225.045040 Gold Current Consensus: 290.4 40035Previous Consensus: 286.4
350Gold30Oil prices are expected to fluctuate around 25 dollars
per barrel in 2002, depending quite heavily on the 30025situation in the Middle East. The gold price is
predicted to be on average 290 dollars compared to
286 dollars that was anticipated three months ago. 25020 Oil20015Source: Beeld Newspaper and Primark
? Figures in tables in parenthesis represent previous consensus forecasts.
? Light grey lines and boxes represent forecast values.
? SD = standard deviation of forecast, High = highest forecast value, Low = lowest forecast value.
? Acknowledgement: Beeld Newspaper, Reuters and SACOB monthly surveys among SA industrialists for
consensus forecasts. Primark and I-Net Bridge for historical data.
The Benefits of being Patient in Investment
The Anglorand Investment Committee meets every Tuesday to discuss and make investment decisions. It consists of not
less than eight people. Two members of the Committee, Charl Marais and Gary Cahn, are traders by nature and
strongly believe in making money by trading and relying on technical analysis. Three other members, Richard
Bonnichsen, Desmond Esakov and David Palmer advocate a much longer-term investment horizon, but they are open to
some trading and technical analysis as a tool to reveal market sentiments. Yigal Pakter and I, Gad Ariovich, the
Portfolio Manager, strongly believe in fundamental analysis. Being an ex-academic (I was a lecturer at Wits University
for several years) I also have a great respect for the so-called “Efficient Market Hypothesis”. The Chairman, Harold
Berenstein, conducts the meetings and eventually we all try to resolve the debate into investment decisions.
Altogether we represent more than a hundred years of investment experience. It is no wonder that we clash regularly
during our investment meetings but in a productive and friendly way. The debate among members of the committee is
derived from different investment schools, different investment beliefs and different personalities. It may be interesting
to review the different schools, beliefs and opinions so as to understand how we arrive at our final investment decisions.
The arguments of members who belong to the trading school and technical analysis.
The trading school claims that you can read market sentiments and subscribe to make money by correctly reading short-
term price developments. There are many sub-streams in the trading school and one of the most prominent believes
that you can derive from historical price and volume patterns price developments in the future. The trading school is
very common amongst securities‟ firms perhaps because it encourages trading, with the end result being commissions
for the stockbrokers whether the clients advisors are right or wrong.
It is perhaps worth indicating that both Fundamental analysts and proponents of the academic school of Modern
Portfolio Theory have no great respect for technical analysis.
The arguments of members who belong to the fundamental school
The fundamental school claims that you can select a company by in-depth study of the firm and its driving forces. In
practice, the main tool of the fundamental analyst is the financial statements of the company. It is perhaps for this
reason many of the top fundamental analysts have in-depth knowledge of accounting. Perhaps an in-depth analysis of
the firm by interviewing management, suppliers, customers and, even more so, its competitors would better reveal the
true value of a company than its financial statements. In practice, it is very seldom that analysts will go all the way to
study the company and the latter is by far more common than the former, the reason being the high costs involved and
the tendency to over-emphasise their marketing function. The analysts are also biased towards maintaining good long-
term relationships with the investigated firms and therefore try to soften negative points. There are very few
independent research organisations and most company research is done by stockbrokers. The fundamental school faces
tough scrutiny in terms of Modern Portfolio Theory which argues that companies financial statements are well known to
the market and therefore the results are fully embodied in the share price. Consequently, academics argue that there is
very little value added by just analysing financial statements of companies.
The arguments of adherents of MPT
The future is basically unknown to us and events will keep surprising us. Thus, the best strategy for coping with the
unknown future is by effective diversification of investment portfolios. MPT also suggests that the only way to beat
the performance of the JSE equity index is by assuming more risk. For instance, having a portfolio of warrants may
beat the performance of the JSE Overall index but the risk of losing your investment and suffering losses is by far
bigger. Critics of the school argue that the school represents an unenterprising approach to investment attitude and
mediocrity. In its extreme form, the investor can buy any share and assume that the prevailing price reflects the value
of the share (what a lazy way to invest !)
The Anglorand way of investment
Having been in the investment field for many years, most of us have certain humility about reading future developments
in current financial markets. Diversification, diversification and diversification are therefore our number one rule in
handling the client money. Over my many years of experience, I have seen many clever people burning themselves and
wiping out the wealth of clients by taking a specific strong view about the future and avoiding diversification.
We also respect fundamental analysis and strongly believe that it is important to buy solid companies. We have our
reservations, however, about the predictability of share prices by fundamental analysis, especially in the short term.
We use fundamental analysis intensively to identify undervalued companies, especially in relative terms – by applying
Dividend Discount Models (DDM) and PEG ratios. We also develop our own proprietary models to reveal
over/undervalued situations with respect to JSE industries and to specific shares.
We do not dismiss technical analysis as a tool for revealing investment sentiments in the market and trying to capitalise
on short- term price fluctuations. It is in the trading areas that the Committee faces the biggest differences of opinion
among the members. The traders and technical analysts believe that short-term opportunities should often be exploited.
Other members, including myself, believe that short-term trading opportunities are rare and that we should be very
conservative in trying to capitalise on what is perceived to be a trading opportunity. I do believe however that shares
have plenty of random price fluctuations. Also, market sentiments could push a share price to be grossly above or
below its intrinsic value. Thus, one should try and “catch” the good shares at a good price from value point of view.
This means a conservative strategy of „range trading‟. If a share falls to what we believe is a very good fundamental
price, we should buy and vice versa. MPT suggests that such opportunities are probably seldom and that one should not
therefore over do it. I believe that by patience and by resisting the temptation to trade frequently money can be made for
clients in addition to the basic price trends Committee members however who believe in technical analysis would like
to exploit what they perceive as trading opportunities far more often than the fundamentalists
Our trading in Anglo shares may be a case in point. For historical reasons, our ex Aurica clients were not exposed to
Anglo shares. All members of the Committee agreed that for the sake of diversification Anglo shares should be
incorporated in our portfolios with possible range trading. When the share price dropped from above R200 to R185, a
majority of the committee members believed that it was “a good enough price to buy at” and we should not wait
indefinitely. Other members with more patience, including myself, argued that we could probably get Anglo shares
cheaper, say, below R160 if we are patient enough. Of course, only the future will tell who was right - as one
committee member commented smartly “Knowledge is important in investment but luck is essential”.
Company Review: Afrox
Afrox – Price bought: 1230
? African Oxygen Limited is in the business of gasses, welding products and healthcare. The company has a
market capitalisation of over R3.5 billion. The group comprises two focused listed companies, the latter
listing being Afrox Healthcare, which is listed in the healthcare sector of the JSE. Afrox owns 82% of
Afhealth. Afrox is 55% owned by the BOC Group, one of the world‟s leading gas companies and the most
global. Afrox operates throughout South Africa as well as in 12 other African countries and exports
products to Australia and Malaysia.
? Industrial contribution 57% and health care 43%.
? Interim results show HEPS up 26%
? PEG average 0.75 PEG 1 = 0.65 Forw PE 10.6. The company therefore seems to be offering fair to good
value on a forward earnings scenario.
? Around 15% below Fair value on DDM (Dividend discount model).
? Continuous growth in HEPS over last 5 years
? Since listing in 1964 Afrox has increased dividends payments every year except one, which was the same
as the previous year.
? Beta 0.69 very defensive
? Excellent increase in cash generated from operations during 2001, up 56% to R982 million. Although only
R47milion on balance sheet, during the last half of the current financial year just under R400 million was
spent on capex mainly on new hospitals. CEO however expects good cash generation again this year.
? Solid if not spectacular but good long-term hold.
April Buys (B) and Sells (S)
Buy price Sold price Current price AGL(B) 18500 17250 BIL (B) 6500 5900 GFI (S) reduced 11400 12700 KMB(S) reduced 4900 4150
David Lewis, CEO; David Palmer, Director, Head Dealer; Adriaan Kamper, Financial Director; Yulindi Taljaard, Compliance Director and Settlements Manager.
The Investment Committee
Harold Bernstein, Chairman; Dr Gad Ariovich, Investment Manager; Dr Richard Bonnichsen; David Palmer Gary Cahn; Charl Marais; Desmond Esakov.
www.anglorand.co.za; rd Tel: 011 - 484 7440 Fax: 011 – 484 6647; 3 Floor, Werksman Chambers, 22 Girton Road, Parktown, 2193.